200-point Move in Dow Is No Longer A Big Deal

A quick question: Is a 200-point move in the Dow Jones industrial average a big change or not?

If you are like many people, your intuition is to say “yes, it is” (especially if you ignored the headline of this week’s commentary). Until fairly recently, a 200-point change was a big move. But, then the bull kept running. And running. With each upward move, the absolute value of the Dow rose. As the Dow rose, the importance of a 200-point change decreased.

A little bit of math will put the discussion into perspective. On August 15, 2011, the Dow gained 213.88 points to close at 11,482.9. This was a 1.9% jump. A couple of months ago, on January 7, 2015, the Dow gained 212.88 points to close at 17,584.52. Though it was almost exactly the same size move, point-wise, the blue-chip average’s percentage gain was just 1.2% on January 7, 2015. The difference was the percentage size of both moves, with the 213-point move last January being proportionally smaller. This is due to the fact that the Dow rose by about 6,000 points over the approximate four-year span between the two days.

We humans tend to focus on the point move of the Dow. This is what is often reported to us, through headlines such as “the Dow rose X points today” or the “Dow was off X points today.” As such, we have learned to frame our expectations of what is or is not a volatile day based on the point move in the blue-chip average.

The problem with such thinking is that it focuses our attention on the absolute change and not the percentage change. This, in turn, makes it easy to have an inaccurate perception of what a significant (or even notable) price change is. In the case of the Dow, a daily swing of 200 points was significant when the blue-chip average was trading near or below 10,000. Such a move represented a change in value of 2% or greater. Now, with the Dow trading near 18,000, it’s not significant. A 200-point move represents a change of just 1.1%, which is within the range of normal daily fluctuations.

None of this is to say that 2015 has been calm. This year is shaping up to be the most volatile one since 2011. As you may remember, notable swings occurred in 2011 as the U.S. markets underwent a correction in part due to the European sovereign debt crisis. To date, the Dow has closed up or down 1.5% or more nine times this year, or once every four days. In 2011, the blue-chip average closed up or down 1.5% or more 52 times, or once every 6.3 days. The sample size for 2015 is still small, so this is not an apples-to-apples comparison, but it does lend confirmation to any feeling you have about volatility being higher now than it has been over the past few years. Be sure to take note of how volatility is being measured: by percentage and not point moves.

Just as you should focus on the percentage move when looking at the market, so should you focus when looking at the prices of securities and funds. A $10 change in the price of AutoZone (AZO) or Chipotle Mexican Grill (CMG) is fairly meaningless given their $650+ share prices. In contrast, a $10 price move would be very significant for Ford Motor Company (F) or Alcoa (A) since both stocks trade at below $20 per share.

Finally, keep in mind that price volatility is a much smaller risk than how you react to it. Investors who keep calm and stick to their long-term, disciplined strategies in the face of high price volatility are more successful than those who give in to the emotional desire to react to it.

The Week Ahead

Just three members of the S&P 500 will report earnings next week: Monsanto Company (MON) on Wednesday and both Micron Technology (MU) and CarMax (KMX) on Thursday.

Although the earnings calendar is light, the economic calendar is packed. Monday will feature February personal income and spending and February pending home sales. The January Case-Shiller home price index, the March Chicago PMI and the Conference Board’s March consumer confidence survey will be released on Tuesday. Wednesday will feature the March ISM manufacturing index, the March ADP employment report, the March PMI manufacturing index and February construction spending. February international trade and February factory orders will be released on Thursday. Friday will feature March jobs data, including the unemployment rate and the change in nonfarm payrolls.

Several Federal Reserve officials will make public appearances: Vice Chair Stanley Fischer on Monday; Cleveland president Loretta Mester and Richmond president Jeffrey Lacker on Tuesday; San Francisco president John Williams and Atlanta president Dennis Lockhart on Wednesday; Chair Janet Yellen on Thursday; and Minneapolis president Narayana Kocherlakota and St. Louis president James Bullard on Friday.